Question

Suppose the return on a European bond is 8 percent per year. If we expect the US dollar to depreciate with respect to the euro by 7 percent in the next​ year, what is the expected dollar return on this European​ bond?

A. 7 percent.
B. 15 percent.
C. 8 percent.
D.1 percent.

Answer 1

B. 15 percent

Step-by-step explanation:

we can explain the answer with an example:

1 dollar is convert into 1 euro

This euro is invested at 8% generating 1.08 Euros

Then as the dollar depreciate the exchange rate is: 1 euro = 1.07 dollars

thus 1.08 euro x 1.07 dollar per euro = 1.1556

The effective rate is 15,56%

from the proposed answer we pick 15% as is the closest.